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The Costs of Regulation or the Consequences of Poverty? Progressive Lessons from De Soto

Commentators have often characterized Hernando de Soto's advocacy of formalization of title for landless squatters as right-wing. And de Soto seems to understand himself as an advocate of individual property rights and free markets. But his analysis of informality and redistribution has a subtext with potentially progressive implications. Although de Soto sometimes reflexively attributes informality to overregulation, informality can always also be characterized as the consequence of being too poor to afford regulated goods. Indeed, for any particular regulation that puts the regulated good out of reach of the poor, we can either attribute this consequence to the cost of the regulation or to the consequences of a distribution of wealth that makes the regulated good unaffordable to those at the bottom. Thus, if the regulation is a good one, its effect on price, and therefore on informality, may argue in favor of keeping the regulation but redistributing purchasing power to blunt its pernicious impact on informality. What we need is a way of evaluating regulations that goes beyond merely observing their impact on the cost of goods and, indirectly, on the prevalence of informality. Specifically, we need to be able to evaluate four different possibilities: (1) regulation with redistribution to offset the impact of the regulation on the poor; (2) regulation without redistribution with its attendant increase in informality; (3) redistribution without regulation; and (4) no redistribution and no regulation. Choosing among these options is the domain of applied political theory. The choice is a far more complicated and demanding task than merely observing that regulation without redistribution increases informality.